:You are the CFO of Ford Motor Company (the company) considering taking on a project that requires $10 million in preliminary funding (in other words, the project will acquire $10 million in costs...

Analysis of Ford Investment project 1
Analysis of Ford Investment project
Student’s Name
Course Name
University’s Name
Date
Analysis of Ford Investment project 2
Analysis of Ford Investment project
Introduction
Capital budgeting is concerned with investing in real assets (projects) and capital
udgeting techniques help determine whether or not the investment will be profitable. It involves
analyzing the cost of the investment and the cash flows that the investment is expected to
generate over time.
In this paper we will analyze the fuel saving project of Ford which will help the company
to save $2500, this project will require an investment of 10 million. We will use different capital
udgeting techniques with which we will be able to analyze the worth of the project.
Company overview
Ford Motor Company is an American MNC corporation; enjoying leadership in global
automotive industry and is based in Dea
orn, Michigan, a subu
of Detroit. The company was
incorporated on June16, 1903 by Henry Ford. The business of Ford can be segregated into two
parts: Automotive and Financial Services; and primarily operating in two segments i.e. Americas
and International. It manufactures and distributes automobiles across six continents with 90
plants worldwide; manufactured 5.532 million automobiles; 213,000 human capitals and net
profit (second quarter of 2012) of $2.6 billion. Automotive business includes designing,
manufacturing, selling and servicing of cars, trucks and services parts; whereas financial services
are facilitated with the help of Ford Motor Credit Company. Most popular
ands of the
company include Ford, Lincoln and Mercury. It has partnership with companies like Microsoft,
Sony, Roush, Sea World, Adventure Island; Water Country USA etc to foster better connectivity
with their customers. It has been named to 2010 DiversityInc Top 50 Companies for Diversity.
Corporate Strategy
Analysis of Ford Investment project 3
The company strongly focuses on the ‘Fordist’ approach. It focuses on developing large
a
ay of products and focuses on fulfilling the need and demand of every segment of the
consumers. Some of the products of Ford such as EcoBoost, Poweshift which has helped the
company in improving the fuel efficiency of the products developed at Ford without affecting the
performance of the Ford.
Ford focuses on five key areas:
 Driving Quality
 Fuel Economy
 Technology
 Safety
 Craftmanship
The company has focused on different cost reduction strategies over past four years which
has helped the company on increasing its focus on its personnel development and technology.
Valuation
For analyzing the project first it is important to analyze the required rate of return or
eturn on equity which will help in analyzing the estimated return on equity of the company. We
will use CAPM model to analyze the required rate of return of the company.
Capital asset pricing model (CAPM), is a model that indicates what should be the
expected or required rates of return on risky assets. It is one of the most important models which
help in analyzing the appropriate discount rate that are used in valuation. The CAPM states that
expected return equals the risk-free interest rate rf plus a risk premium that depends on beta and
the market risk premium rm - rf
Expected return = Risk free rate + beta(Market risk – Risk free rate)
Analysis of Ford Investment project 4
The market risk can be calculated by the betas of the interest, inflation and gross national
product.
Cu
ent Rate of Return on Risk Free Assets = 3.57%
This is the yield on 30 year US Treasury bonds. (http:
www.bloomberg.com/markets
ates-
onds/government-bonds/us/)
Beta of Ford = 1.57 (http:
finance.yahoo.com/q?s=F)
Market Rate of Return = 8.6% (http:
iz.yahoo.com/ic/330.html)
Using the CAPM equation:
Expected...